SAN JOSE, Calif. — In 2016, start-up founders sang, “Theranos doesn’t represent, we are better,” in a holiday video created by the venture capital firm First Round Capital.
Over the next few years, several columnists wrote that Silicon Valley shouldn’t be blamed for Theranos.
Last month, Keith Rabois, a venture capitalist, said on Twitter that articles connecting Theranos with Silicon Valley culture contained “more fabrication than anything ever uttered by Trump.”
The technorati in Silicon Valley and beyond have long tried to separate themselves from Theranos, the blood testing start-up in Palo Alto, Calif., that was exposed for lying about its abilities. But the fraud trial of the company’s founder, Elizabeth Holmes, has shown that just as Bernard Madoff was a creature of Wall Street and Enron represented the get-rich-quick excesses of the 1990s, Theranos and its leader were very much products of Silicon Valley.
The usual refrain went like this: Theranos was more a health care company than a tech company. It raised money from wealthy families and people outside the tech industry, while insiders saw through the hype.
But testimony and court exhibits in Ms. Holmes’s nearly four-month trial, which was capped on Monday when a jury found the entrepreneur guilty of four of 11 counts of fraud, starkly underlined her participation in Silicon Valley’s culture.
Ms. Holmes, 37, used the mentorship and credibility of tech industry big shots like Larry Ellison, a co-founder of Oracle, and Don Lucas, a Silicon Valley venture capitalist, to raise money from others. She lived in Atherton, Calif., amid Silicon Valley’s elite and was welcomed into their circles.
She also used the start-up playbook of hype, exclusivity and a “fear of missing out” to win over later investors. She embodied start-up hustle culture by optimizing her life for the maximum amount of work. She dismissed the “haters” and anything that interfered with her vision of a better world. She parroted mission-driven technobabble. She even dressed like Steve Jobs.
No industry wants to be judged only by its worst actors. And many venture capitalists who heard Ms. Holmes’s impossibly lofty claims didn’t fall for them. But if anyone in Silicon Valley was suspicious of her proclamations, none spoke publicly about it until after things went south.
Immediately after The Wall Street Journal exposed Ms. Holmes’s alleged fraud at Theranos in 2015, some prominent tech investors even rushed to defend her in a bit of kneejerk tribalism.
Even the judge who oversaw Ms. Holmes’s case, Edward J. Davila of U.S. District Court in San Jose, Calif., agreed that Silicon Valley culture was an essential piece of her trial. He allowed her lawyers to discuss the tech industry’s overly optimistic puffery as part of her defense.
“It’s common in Silicon Valley for promoters to engage in that type of conduct,” Judge Davila said in a hearing in May before the trial began.
At its best, Silicon Valley is optimistic. At its worst, it is so naïve it believes its own hogwash. Throughout her trial, Ms. Holmes’s lawyers argued she was simply a wide-eyed believer. Any statements that weren’t entirely truthful, they said, were about the future. It was what investors wanted to hear, they said.
“They weren’t interested in today or tomorrow or next month,” Ms. Holmes testified. “They were interested in what kind of change we could make.”
Soon after Theranos got started in 2003, Ms. Holmes used her vision of the future to win over investors and advisers like Mr. Ellison and Mr. Lucas. Mr. Lucas, who was chairman of Theranos’s board until 2013, was involved with more than 20 investment vehicles that backed Theranos. Those included his son’s venture firm, Lucas Venture Group; another vehicle, PEER Venture Partners; and trusts and foundations associated with members of his family.
Mr. Lucas introduced Hall Group, a real estate firm that put $4.9 million into Theranos, to Ms. Holmes. His nephew’s firm, Black Diamond Ventures, invested $5.4 million. Other Silicon Valley investors included ATA Ventures and Beta Bayview, a fund operated by Crosslink Capital.
Mr. Lucas and his son have since died. The Lucas Venture Group didn’t respond to a request for comment.
Dixon Doll, founder of the Silicon Valley investment firm DCM, also invested, as did Reid Dennis, founder of the venture firm IVP, which has backed tech companies such as Slack, Twitter and Snap. Draper Associates, founded by the venture capitalist Tim Draper, also invested in Theranos, as did two funds operated by his other firm, Draper Fisher Jurvetson.
A DCM representative said Mr. Doll had left the firm more than eight years ago, and a spokeswoman for DFJ declined to comment.
In a statement, Mr. Draper said Ms. Holmes’s verdict concerned him because it suggested that America’s spirit of entrepreneurship was in jeopardy. “A willingness to bet on these entrepreneurs and their visions has made Silicon Valley the innovation engine of the world,” he said.
Not everyone who heard Ms. Holmes’s pitch was wowed. Bijan Salehizadeh, an investor at Highland Capital Partners, said he did not invest in Theranos in 2006 because Ms. Holmes was unwilling or unable to answer most of his questions.
But as Theranos’s fund-raising made headlines, Mr. Salehizadeh questioned his judgment. Venture capitalists who hung out at the Rosewood Hotel on Sand Hill Road, one of Silicon Valley’s main arteries, in Menlo Park, Calif., began buzzing about the company, he said.
“They were like: ‘This hot Theranos thing — you as a health care guy saw it and didn’t do it? How could you have possibly passed on a unicorn if it was sitting in your office at the earliest stages?’” he said.
Ms. Holmes used that hype to reel in bigger checks from wealthy families, including heirs to the Amway, Walmart and Cox Enterprises fortunes. Industry insiders also offered their endorsement. The media mogul Rupert Murdoch met Ms. Holmes at a Silicon Valley gala hosted by Yuri Milner, a tech investor. Mr. Milner praised Ms. Holmes to Mr. Murdoch, according to “Bad Blood,” a book by John Carreyrou, a former Wall Street Journal reporter.
Brian Grossman, an investor at the heath care-focused hedge fund PFM Health Sciences, learned about Theranos through Thomas Laffont, a co-founder of Coatue Management, a prominent investment fund with a San Francisco presence. In an email that was part of the court filings, Mr. Laffont gushed that Theranos had “one of the most impressive boards I’ve ever seen” and said Mr. Grossman’s firm should let him know “ASAP” if it was interested in an introduction.
Coatue did not respond to a request for comment and PFM Health Sciences declined to comment.
As Theranos brought in more shareholders, Ms. Holmes tightened her grip on the company, ensuring she would control the voting power even if the start-up went public. Chris Lucas, founder of Black Diamond Ventures, explained on a call with other investors, which was recorded and played in court, that this was typical for such companies.
Ms. Holmes’s supervoting shares were “just like some of the other high-flying companies in Silicon Valley,” he said.
In 2014, DFJ bragged about its investment in Theranos on Facebook. “Proud to have backed Elizabeth Holmes and Theranos for over a decade, as her very first investor,” the firm wrote.
The next year, when Mr. Carreyrou was investigating Theranos’s claims for The Journal, Ms. Holmes embraced Silicon Valley’s favorite form of deflection: Label anyone who asks hard questions a hater. Before Mr. Carreyrou published his first exposé about Theranos, Ms. Holmes and her partner at the time, Ramesh Balwani, who was the start-up’s chief operating officer, poked fun at the reporter’s French heritage.
“Proud cynic,” Ms. Holmes wrote in a text message to Mr. Balwani.
“Cynicism and skepticism are diabetes of the human soul,” Mr. Balwani responded. “No one should be proud of diseases.”
After the Journal article was published, Ms. Holmes used a rebuttal embraced by many in the tech industry. “This is what happens when you work to change things,” she said in a TV interview. “First they think you’re crazy, then they fight you, and then all of a sudden you change the world.”
In the years since Theranos collapsed, more tech start-ups have followed its strategy of looking outside the small network of Sand Hill Road venture capital firms for funding. Start-ups are raising more money at higher valuations, and deal-making has accelerated. Mutual funds, hedge funds, family offices, private equity funds and megafunds like SoftBank’s Vision Fund have rushed to back them.
Mr. Salehizadeh said Silicon Valley’s shift to a focus on fund-raising over all else was one reason he had left to set up a private equity firm on the East Coast. The big money brought more glitz to tech start-ups, he said, but it had little basis in business fundamentals.
“You’re always left feeling like either you’re an idiot or you’re brilliant,” he said. “It’s a tough way to be an investor.”